Government in the Market II

Lecture 6
Question 1
. (Figure: Market for Tickets II) Refer to Figure: Market for Tickets II to answer the following questions.
a. What is the size of the tax?
b. What price do consumers pay before the tax is
imposed?
c. What price do consumers pay after the tax is
imposed?
d. What price do producers receive before the tax is
imposed?
e. What price do producers receive after the tax is
imposed?
f. Using letters, what is consumer surplus before and
after the tax is imposed?
g. Using letters, what is producer surplus before and
after the tax is imposed?
h. Using letters, what is the government tax revenue?
i. Using letters, what is the deadweight loss?
Question 2

The market for cigars is characterized by QD = 10 – 0.25P and QS = 0.15P,

where P is price per box of cigars and Q measures boxes per hour.
a. What is the equilibrium price of cigars?
b. Suppose the government taxes sellers $5 per box. What are the after-
tax prices that buyers pay and sellers receive?
c. Suppose the government taxes buyers rather than sellers $5 per box.
What are the after-tax prices that buyers pay and sellers receive?
Question 3

(Figure: Market for Good X II) Use Figure: Market

for Good X II to answer the following questions
a. What is the size of the subsidy?
b. What are the prices consumers pay before and
after the subsidy?
c. What are the prices sellers receive before and
after the subsidy?
d. What are the levels of consumer surplus before
and after the subsidy?
e. What are the levels of producer surplus before
and after the subsidy?
f. How much does the subsidy cost the government?
g. What is the deadweight loss of the subsidy?
Question 4
The supply and demand for solar panels are given by QS = 5P – 5,000
and QD = 15,000 – 5P, where P is price per solar panel and Q measures
the quantity of solar panels. Suppose the government provides a $500
subsidy per solar panel.
a. Calculate the price consumers pay before and after the subsidy.
b. Calculate the price producers receive before and after the subsidy.
c. How much does the subsidy program cost the government?
Question 5
Many states have minimum price laws for cigarettes. Assume that the
demand equation for cigarettes is QD = 4,000 – 300P, while the supply
equation is QS = –1,000 + 200P, with quantity in thousands of packs.
• Assume that state governments replace the $12 price floors with a tax
of $5 per pack, resulting in the same number of packs sold as under
the price floor. The price floor would lead to a deadweight loss of
$_____; the $5 tax would lead to a deadweight loss of $_____.